Fundamentals of Microeconomics

Economic systems

Economic System

• ownership of the factors of production;• methods to motivate, coordinate @ direct

economic activity

• Market economy• Command Economy• Mixed Economy

Market economy

• Private property• Freedom of enterprise and choice• Self-interest• Competition• Markets and prices• Specialization

– Division of labor– Geographic specialization

• Use of money• Active, limited government

Market System Questions• What will be produced?

– consumer sovereignty– dollar votes

• How will goods be produced?– technology– resource cost

• Who gets the output?– willingness to pay

• How is change accommodated?– self-interest

• How is progress promoted?– technological advance– capital accumulation

Supply (S)

• Law of Supply• The Supply Curve• Market Supply• Determinants• Changes in S

Market Equilibrium

• Price @ Quantity• Efficient Allocation

Market Equilibrium

Government Interventions

Command economy

• Social (state) property• Collective decision making• Centralized management (State) by means of planning• Monopolized productive processes• Redistribution in production and its integral parts

(distribution incl.): to be addictive to power means addictive to products

Main problem: access to the principle means of distribution

Bogdanov A. “Integrated (socialized) natural economy”

Command economy

• Soviet Union, Eastern Europe, China• System was a failure• The coordination problem–Set output targets for all goods

• The incentive problem–No adjustments for shortage or surplus

• The market system–Private ownership–Markets

• The command system–Government ownership–Central planning board

Index of Economic Freedom

• Ranking of 157 countries for 2008

Free MostlyFree

MostlyUnfree

Repressed

1- Hong Kong3- Ireland5- United States

20- Belgium31- Spain48- France

101- Brazil126- China134- Russia

148- Venezuela156- Cuba157- North Korea

Mixed economy

• Market mechanism+ State activity

• Basic Carastristics:- Form of property (state / private property)- Mode of coordination of economic activity

(plan / market)

ResourceMarket

ProductMarket

Businesses HouseholdsBoth Flows Are Equal